Shadow Play


Barbara Samuels and I probably do not disagree as much as her comments might suggest.

Two years ago, anyone who talked to investors about Latin America encountered a sort of unquestioning enthusiasm about the whole region, including Mexico. There is an influential body of opinion that still sees the Mexican crisis as an anomaly. My point is that the same overstatement of the likely impact of reform that led to Mexico's boom-bust cycle has occurred for a number of other important developing countries. Even now, I believe investors have failed to think seriously about the policy dilemmas that major emerging market nations face. How, for example, will Argentina, which has 18 percent unemployment, be able to engineer a recovery while committed to its one peso-one dollar policy? (Alternatively, how could it abandon this policy without a crisis of credibility?) Can Malaysia really continue a growth path based on enormous inflows not only of capital but of labor, and what will happen to its ambitious public investment plans if it cannot?

One institutional investor told me about a presentation by a rating service on Indonesian bonds. Along with others in the audience, the investor was disturbed by the evident unreliability of Indonesia's data. The presenter responded with an analogy to Indonesian puppet shows, in which one looks at the shadows rather than the puppets; in other words, investors were being asked to be optimistic based on the general idea that developing countries have great prospects rather than on a careful examination of this specific country's macroeconomic situation. That kind of sloppy thinking led to Mexico's crisis, and may well lead to comparable crises in other countries.

Does that mean there are no investment opportunities in emerging markets, or that there will be no national success stories? Of course not. Perhaps the best way to put it is to quote a senior Mexican official who remarked in 1993, "You know, four years ago, when we couldn't attract any money, we really weren't that bad. But right now, when everyone wants to give us money, we really aren't that good."

Originally published, 11.95